Implied volatilities collapsed after last week's earnings report
Nvidia Corporation (NASDAQ:NVDA) has been trending higher over the past two years -- up more than 500% from its May 2016 lows south of $40. While the shares have pulled back since last Thursday's earnings-related record high of $260.50 -- down 4.6% today at $243.61 -- they appear to be finding a foothold in the $240 region, home to its early May pre-bull gap levels. If history is any guide, the chip stock could take a big bounce in the next few weeks.
Specifically, implied volatilities on Nvidia's front-month options plummeted in the wake of last week's earnings report. Most recently, NVDA's Schaeffer's Volatility Index (SVI) was docked at 31.8% -- in the 10th percentile of its annual range, suggesting premium on short-term contracts is relatively cheap at the moment, from a volatility perspective.
According to data from Schaeffer's Senior Quantitative Analyst Rocky White, there have been seven other times since 2008 NVDA has been trading near 52-week highs with its SVI ranked in the lower fifth of its annual range. This has resulted in an average one-month gain of 5%. Another rally of this magnitude would put Nvidia shares back above $256.
Those looking to bet on another breakout may want to consider using options. In addition to the relatively low implied volatilities, NVDA's Schaeffer's Volatility Scorecard (SVS) reading comes in at an elevated 95 out of a possible 100. This indicates the security has tended to make outsized moves over the past year, relative to what the options market has priced in.
There's still plenty of skepticism being priced into the shares, too, and a rebound could encourage the skeptical analyst crowd to upwardly revise their ratings. Ten of the 26 brokerages covering the tech stock still maintain a "hold" or "strong sell" rating, and upgrades could draw more buyers to Nvidia's table.